New SEC guidance could thin the crowd on Michigan crowdfunding deals

If you want to hit up the crowd for equity capital under Michigan’s new crowdfunding law, you’ll probably have to do it without Tweeting, Facebooking or Linking In details of your deal.

Newly issued U.S. Securities and Exchange Commission guidance makes it clear that the social media tactics companies have used to raise billions of dollars on crowdfunding sites like Kickstarter or Indiegogo won’t be allowed for Michigan companies trying to sell stock via crowdfunding, according to West Michigan securities experts.

On April 11, SEC staff released new Compliance and Disclosure Interpretations (CDIs) related to intrastate offering exemptions such as the Michigan Invests Locally Exemption (MILE), which allows Michigan-based companies to raise money from Michigan-based investors. The CDIs offer insight into the SEC staff’s stance on crowdfunding portals as well as the use of social media and the web to promote intrastate stock offerings.

Companies can advertise their stock offerings, the SEC wrote, but only to residents in the state where the company is based. As a result, crowdfunding websites that conduct stock sales must implement “adequate measures” such as disclaimers or restricted-access websites to ensure the stock offerings are made only to residents of the state.

Additionally, using a company’s website or social media sites to offer securities is generally not permissible under the intrastate exemptions because those messages would reach potential investors outside of the state.

“The SEC is saying, in effect, that the intrastate exemption is truly intrastate — if you’re promoting [your offering] outside of the state, that’s a problem,” said attorney Jeffrey J. Van Winkle, a partner at Grand Rapids office of Clark Hill PLC.

The restrictions may come as a surprise to Michigan entrepreneurs hoping to raise capital from non-accredited investors under the state’s MILE law. Social media promotion has been a staple of successful crowdfunding campaigns to raise money for movies, medical devices and restaurants. Pono Music, a new digital music player launched by musician Neil Young, raised more than $6 million on Kickstarter, which offers rewards rather than equity to people who pledge money.

Crowdfunding which relies on donations is significantly different from investment crowdfunding which involves the offer and sale of securities, according to G. Ann Baker, deputy director of the state of Michigan's Corporations, Securities, & Commercial Licensing Bureau. In an email to MiBiz, Baker wrote "The federal intrastate exemption is very narrow and places limitations on the manner in which an issuer may offer and sell its securities...it would be very difficult to use an issuer's website or social media without losing the federal instrate offering exemption."

"Companies are not going to be able to take the Kickstarter model and adapt it to equity crowdfunding in the same way,” said attorney Seth W. Ashby, a partner at Grand Rapids-based Varnum LLP.

Even one instance of using a company’s website or its social media accounts to promote a crowdfunded offering could cost a company its intrastate exemption, he said. That might prove expensive for the offending company, which could be required to return any capital raised plus interest to investors, Ashby explained.

Company issuers that lose their exemption might also become subject to onerous and expensive federal registration requirements that can cost more than $100,000 in auditing, legal and filing fees.

The rules don't just apply to Michigan companies raising money under the MILE law; six other states have adopted equity crowdfunding laws using intrastate exemptions: Georgia, Indiana, Kansas, Maine, Wisconsin and Washington. The SEC restrictions on promoting an exempted offering via social media or the web would apply to companies raising money in those states, too.

Bottom line: Companies will need to be extremely cautious in complying with both the federal and state laws, Clark Hill’s Van Winkle said.

“The issuers need to be educated,” Van Winkle said. “I don’t think there’s a realization how different this is from Kickstarter or Indiegogo.”